Sri Lankan banks facing pressure on credit profiles, rising NPLs: Fitch Ratings

Nov 13, 2019 (LBO) – Pressure on Sri Lankan banks’ financial profiles due to challenging operating conditions became more apparent in the banks’ 1H19 results, Fitch Ratings says in a new report.

According to the new report, the sector’s non-performing loans (NPLs) continued to rise rapidly, up 39 percent in 1H19 (64% in 2018) and 46 percent for 8M19.

The deterioration in asset quality reflects the challenging operating conditions, the aftermath of high loan growth, and the impact of the Easter Sunday attack in April 2019.

The gross NPL ratio for the sector continued to rise, to 4.8 percent in 1H19 from 4.2 percent at end-1Q19 and 3.4 percent at end-2018.

In addition, the stock of rescheduled loans has also been growing, indicating that asset quality could continue to remain weak.

Fitch Ratings said the sector’s loan growth is muted, after strong loan expansion during 2015-2018.

It rose by only 1.3 percent in 8M19, reflecting weak borrower sentiment and subdued economic activity.

“We believe loan growth could remain muted, particularly until the upcoming election cycle has concluded in 2020,” the rating agency said.

“The loan/deposit ratio for the sector decreased to 87% by end-1H19 from 91% at end-2018, indicating that funding and liquidity pressure has eased.”

After-tax profit for Fitch-rated banks in 1H19 dropped, with net income of LKR41 billion (1H18: LKR56 billion; 2018: LKR114 billion), amid slower loan growth, increased credit costs and higher effective taxes.

“Recent capital-raising has faced execution risks, with issuance being undersubscribed,” the agency said.

“Still, further capital issuance is planned for 2H19 and capital raisings are likely to continue due to ongoing capital needs.”

Basel III capital standards came into full effect in 2019, with banks being able to comply with the minimum requirements.

The full report “Sri Lankan Banks Report Card 1H19” is available at www.fitchratings.com.